14 tips for purchasing life insurance

Buying life insurance is an important part of financial planning — but understanding insurance and buying the right product can be tricky. From whole to term life, riders to convertibility clauses, how do you make sense of all the choices?

Most people rely on the expertise of their insurance advisor, broker, or sales representative to help them make the right decision. Yet, for some people, insurance representatives have developed a bad reputation, and many people do not trust the “recommendations” they receive.

From my own experience in the insurance industry, and knowing how representatives are trained, I wouldn't trust many insurance sales reps either. Here are some steps you can take to ensure you get the right product for the right price:

Understand your needs. No one understands your financial situation better than you. That means you should avoid letting someone else tell you how much protection you need. You can get a rough estimate of your insurance needs by adding together your debt, estimated funeral costs, and six months to a year of income replacement. [J.D.'s note: One common rule of thumb is to multiply your yearly income by between 5 and 10, using the lower level if you don't have many dependents and few debts, and the higher level if you have larger debts and multiple dependents. But Ray is right: understand your own needs.] Taking stock of your financial policy can allow you to select the right policy for your needs. As sales representative, we were trained to sell large policies. Remember, you may not need an exorbitant policy — you need the policy that's right for you and your family's financial situation.

Understand term insurance versus permanent insurance. Understanding the difference between term and permanent life insurance (such as whole life) can help you make an informed decision about your insurance needs. Today, a term insurance policy should be able to cover most of your debt and financial needs. In turn, you may not need to purchase a whole life policy. Try not to be sold by the “what if” scenario you might hear from an insurance sales rep. Insurance companies traditionally make more profit from whole life policies than term policies, so be prepared to hear a sales representative promote whole life as the best possible choice (even though it might not be the best fit for your needs). Remember, buy what you need and make adjustments as changes become necessary. Term insurance is typically renewable and should have a convertibility clause which allows you to make changes in the future. There are certain situations where a whole life policy maybe more advantageous than term; however, do not purchase it simply because your sales representative told you should.

Speak with an independent broker. These brokers will have access to many more products than just one firm can provide. When I worked as an independent broker, I was able to offer much more to my clients than just a company product.

Avoid one-meeting recommendations. If your broker makes a recommendation in the first meeting, you know that they have not really analyzed your situation and looked for best options. So just say, “No, thank you” and keep researching.

Understand how the advisor gets paid. Find out if they are compensated through commission, fee-plus-commission, or fee only. If there is any commission involved with the sale, make sure to look at all alternative products available. With commissions, the advisor may have a conflict of interest. Just because your advisor is commission-based doesn't mean they are bad — just ask more questions with them. I always worked on 100% commission, but I would give my clients several options and disclose if I got paid differently.

Recognize that insurance is for protection — not investing. Term insurance provides protection only, without a savings component. Whole life and universal life policies have a savings component and are much more expensive. You are almost always better off just paying for term insurance, and using the cost savings to invest elsewhere.

Ask the tough questions. Don't be afraid to ask the advisor questions. You should know the product inside out before buying it. Is the policy renewable and non-cancelable? How long are premiums guaranteed for? Is there an accidental death rider? What are the exclusions?

Watch out for “know-it-all” advisor. If the advisor answers all your questions without referring to anything, or pretends she “knows it all”, chances are that she does not. Insurance policies are complicated, and even the best advisors do not know every product 100 percent and may have to look things up. There is nothing wrong with that.

Compare similar products. When you price shop, make sure you compare similar products.

Don't replace old whole-life policies. If you have had a whole-life policy for several years, try not to replace it. You may lose all the premiums you have paid. You may also have to pay new administration fees (if applicable), and reset some clauses (such as the suicide clause). If your situation has changed and you need more insurance, just buy more. (This warning does not apply to term life.)

Do not buy expensive riders. The advisor might ask you to add on all types of riders. Stay away from them unless you fully understand them and need them. Again, in training there was always an emphasis on selling riders. Often I didn't see any benefits to the client.

Do your homework. Make sure you do your homework before purchasing an insurance product. Make sure it fits your needs and budget, and make sure you understand the contract. The advisor is obligated to explain it to you. Don't sign until you understand the contract.

Take a 30-day free look. You have 30 days to look at the policy and understand it. If you are not satisfied with it during that time, cancel the policy and you will get your premium back.

Keep it simple. Do not make your insurance planning complicated. Because it is based on protecting your family, it should be based on your needs. Don't fall for all the bells and whistles the company may try to sell to you.

I hope these fourteen steps will help in your insurance planning. The basic idea is to educate yourself by doing your homework so that you can understand what you are buying.

In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.

Some good advice. I suspect what a lot of readers would like is an actual “How to figure out how much term insurance you need” post. I did a post like that a long time ago but it was very specific to my own situation (ie how did I calculate how much I needed). This is one area where I think rule of thumbs can be quite inaccurate – using a multiple of current income for insurance is similar to using a percentage of income for retirement planning. It’s not the worst way to do it but I think you… Read more »

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Ray

11 years ago

You are right Four Pillars. Everyone’s situation is different there is no one rule that will fit all when calculating how much insurance you need.

Would socking away money in a life insurance annuity protect your money from taxes later on?

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Al

11 years ago

I’m single, 29 have no dependants and no debt. I got a packaged deal with my insurance agent about 2 years ago, it was my car insurance and a 10 year term life insurance ($200,000 around $16/month, car insurance is about $110/month). I got it because when I took the physical examination for it I came out at the highest possible health level (premium, or something like that). My agent said it would be good if I kept it because that way I would lock in the term price and then when the 10 year term was over I could… Read more »

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frugalscholar

11 years ago

@Al (#34)–I am a teacher and certainly not an expert. I believe one only needs life insurance if one has dependents who are DEPENDENT on one’s income. That is why singles and 2-income couples with no kids probably do not need insurance. If you have a spouse, child, sibling, parent, anyone DEPENDENT on your income, then you do need insurance. If your spouse or partner could not pay for your mortgage without your income, then you do need life insurance. And so on.Your situation may change, of course.

@ Frugalscholar. Virtually no one would NOT meet any of those categories. Who has parents that may suddenly become unable to work, not stay employed to earn their pension or other retirement benefits, or even end up in a nursing home without adequate long term care insurance? Even if you have no kids now and are in your early 20s, one should LOCK in the lowest rate of insurance while it is the CHEAPEST due to one’s optimal health. Life insurance virtually never goes “on sale.” Convertible term insurance is a great option for young, healthy people because it can… Read more »

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Lissa

11 years ago

I have a question that probably is very dumb, but.. where do I START? Do I go through a major company, or would I better off talking to someone at the insurance company I already use for other things? Our credit union offers life insurance as well – should I look into this? Or how would I find an independent broker?

I appreciate the advice above, I just have no idea where to start. If anyone can help, it would be great – thanks:)

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Wojciech @ Fiscal Fizzle

11 years ago

This is an excellent summary. My wife and I recently got married, and have been approached by several insurance brokers to try to sell us their product. We definitely don’t want to jump into anything without understanding it completely, but don’t want to wait on the sidelines either for something that’s important to have.

Thanks for sharing your insight.

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Leanne

11 years ago

To tag on Lissa’s comment… I’d love some discussion of this issue as well. How do you find out whether a life insurance company is particularly reputable? For example, I believe Consumer Reports does surveys to get a sense as to how car insurance companies perform (do they tend to contest claims, take a long time on payment, etc) so I wonder if there is anyplace that does something similar for life insurance companies? And is a company that offers car and home/rental insurance also likely to offer life/disability insurance, or do you need to look someplace else (like through… Read more »

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mike a

11 years ago

hey jd. will you provide some ratings sites for life insurance companies? since this is ‘get rich slowly’, free sites only and without registering, please 😉

p.s. your’s is a great site, been meaning to tell you for a while now…

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Beth

11 years ago

Good advice 🙂 It answered some of my questions. The rest I think only I (and my broker) can answer.

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Ray

11 years ago

Great questions. what i am getting from most of the questions is a guide to getting insurance, I’ll work on one and maybe we’ll post it here or back on my blog with a link to it.

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Kevin

11 years ago

I appreciate the effort that went into these series of articles, but I’m flabberghasted that the single most important question of all STILL hasn’t been answered: “How do I know how much life insurance I need, or if I even need it at all?”

Detailed explanations of the various types of insurance are all well and good, but a fundamental step has been overlooked here.

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Mike

11 years ago

For those looking at how much they need, that’s probably the hardest and most important part. Everyone’s situation is different. There are numerous calculators on the web that can help. I used to sell life insurance, but don’t anymore. I always used the Human Life Value approach. This may have overstated someone’s need (as it does not take into account possible Social Security benefits), but I would rather err on the high side than the low side.

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ben

11 years ago

Dave Ramsey has long endorsed Zander Insurance. My wife and recently purchased term policies for ourselves. We did a quote from Zander before we ever met with our insurance rep. We were pleased to find that the quotes from our insurance rep and the quotes from Zander were near identical even though they were from several different companies. It was worth our time to do some research beforehand to know comparable rates. We met with two insurance reps. One tried to sell us whole life policies; one listened to our requests for term policies and made corresponding selections. We now… Read more »

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Aaron

11 years ago

Thanks for the follow-up post Ray. I think this is really geared more towards insurance shoppers than the previous one because it’s less philosophical (and takes a smaller bite out of the elephant).

I would still argue that focusing too much on tip two might lead to too much confusion with little benefit. I think it’s better to think about how long you might need the coverage, how important price is, and how guaranteed you want it to be – the answer to these three questions will narrow down the product field significantly.

Overall, great job again.

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Jim

11 years ago

Buy term and invest the difference.

This is what any competent financial advisor will say. This is what consumer advocates will say. This is what Dave Ramsey, Suze orman, and countless others say.

STAY AWAY FROM WHOLE LIFE AND OTHER NON TERM POLICIES. BUY TERM AND INVEST THE DIFFERENCE!

yes, buy term and invest the rest IF you know what are you doing. Cash value makes a lot of sense and in the long run it is a good use of your money, to supplement retirement TAX FREE, unlike 401 k and other that have substantial taxes at withdrawal time.

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Paularado

11 years ago

For those who are looking for guidelines to determine your needs, maybe some of us who have purchased insurance could say a little about how we arrived at our numbers? Here was our logic. We needed enough to: 1. pay off the house. Our house was under construction at the time, so selling it was out of the question. However, given the current housing situation, everyone should assume that selling your house isn’t an option. 2. replace income. We put in a cushion of 2 years of BOTH our incomes just in case the remaining spouse chose not to work… Read more »

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HaideeL

11 years ago

@Paularado Who do you use for life insurance?

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HaideeL

11 years ago

I am so frustrated. We have life insurance which seems accurate based on the MSN calculator. 20 yr term, 500k for me and 700k for my husband through SBLI. I think we’re in pretty good health. We’re 38 and have a 3 yr old and a 5 yr old, thus the insurance. I have a debt payment plan that gets us debt-free including our mortgage within 10 years. Hopefully less, but we’ll see. My financial “advisor” is pushing whole life insurance as a savings vehicle for college and more. The whole message from him is totally stressing me out. He… Read more »

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Leanne

11 years ago

Inspired by the dialogue about this issue, I spent some time poking around looking for different calculators and advice on “the basics”–and came across this helpful site I thought some of the rest of you might also find valuable:

There are calculators for life insurance, disability insurance, etc, and also some basic tips on where/how to go about actually getting quotes.

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Gabe

11 years ago

What about the need for ANY life insurance in general?

JD – if you have a bunch of saving and investments in the bank, and no kids, why would you need insurance at all? Isn’t all the hard work and frugality you’ve been practicing a form of self-insurance? You’ve written several times about a “rainy day fund”; well, wouldn’t a death be considered a really really rainy day? Why should it be any different?

One reason for a single person with no dependents to get life insurance is to create their own retirement. Wealthy people take out insurance on INFANTS automatically, at about 2 weeks old–about $1 Million. The cash value has a guaranteed minimum interest that makes savings accounts and CD’s look like more of an expense. The high potential interest is a no-brainer, and the policy will pay ITSELF from the cash value (until it runs out) if the premium isn’t paid. Even a $25 per month permanent insurance product on a 1 year-old will substantially fund college, provide life-long protection, and… Read more »

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Ray

11 years ago

@ Gabe well if you have no dependents than maybe you dnt need insurance. The idea of insurance to to protect your family, if you have no kids but a spouse and say $200,000 in mortgage your rainy day fund will not cover any of that, even if you had $200K in investments after tax it would be lower. So the idea so to make sure your spouse continues with her life style

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Gabe

11 years ago

Ray – that’s assuming you want to pay off your mortgage all at once. I have a 30 year mortgage. With the pre-payment of principle that we’re doing, we’re looking at paying it off after 25 years (approximately 22 years from now). If one of us were to die, is is really so bad to have to wait to full 30 years to pay it off?

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Ray

11 years ago

@ Gabe- good point. Chances are that just one income will not be enough to continue paying for the mortgage, taxes, heating & Electricity. Sure you can have some investments that you can use to pay it down, but the investments are for your retirement by depleting them you will put your retirement at danger. The other option would be to sell it and down seize, but this could happen at a bad time (like right now)

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Gabe

11 years ago

That’s true as well, but I can also think of better ways to spend $50 a month for the next 30 years. Especially when you look at the alternative. I just did the math in Excel, and getting a yearly investment that pays out at 6% would give me around $50K.

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Ray

11 years ago

While that maybe true but you leaving out two important things: 1. Taxes 2. You dnt know when you’ll need the insurance money. If the insured dies in 25 yrs ok but what if they die in 5 or 10 yrs? Depending on the age with $50 you can get more than $50K in insurance. You can not replace insurance with investments. You have home insurance right? and car insurance? You have those but statistically speaking chances of you cashing on either one is lower than you cashing in on a life insurance policy. To me insurance is a vital… Read more »

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Aaron

11 years ago

@HaideeL, I’d consider the source. A good advisor should be compassionate about your perspective and goals. I wouldn’t knock somebody just for bringing this strategy up, but if it is “stressing (you) out”, I’d worry they weren’t putting you first. People who use life insurance as an investment tool expose themselves to a different set of risks that the insurance company poses. Dividends are not guaranteed in whole life contracts and universal life contracts may fluctuate their internal costs for any reason the insurance company sees fit (and it has nothing to do with company stability or history, which is… Read more »

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David

11 years ago

Insurance is a waste of money. If you invest the money that you give away to the insurance company every month then you would have more than enough money to pay for your “possible” expenses.

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Ray

11 years ago

@ David, you COULD have enough over the very long term, but what if something happens to you know? You become sick or suffer a disability or you die what will happen to your family. That is why I suggest you purchase term insurance to cover your immediate obligations, ones your mortgage is paid off and kids out of the house than you wnt need insurance for protection.

You could save all the money you pay for your home and auto insurance, chances of your house burning down are extremely low, yet you still have insurance.

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Wesley

11 years ago

My wife and I love our financial planner (with Northwestern Mutual) and truly feel he has our best interests at heart (while, of course, making money doing what he’s doing). There’s a genuine relationship there. But more and more I’m regretting investing in Whole and Universal life insurance. We also have term policies and are using the life insurance as investment vehicles. He speaks very highly of them (again, I know his cut on those is much greater than anything else), and I don’t doubt there are pro’s to it – but is there any good exit strategy if I… Read more »

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getagrip

11 years ago

First, thanks for the article, good follow-up. @ HaideeL Why would anyone put money earmarked for college into an investment vehicle that likely charges high fees and is guaranteed to lose value the minute you put it in? They have to pay for the term policy on this insurance “investment”, and that money comes directly out of the amount you’re putting in and has to be more than made up for by the relatively short time before you’re kids get to college (12-13 years for the first one). That’s the argument against using front loaded mutual funds where you already… Read more »

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HaideeL

11 years ago

@Aaron and getagrip, Thanks for your responses. I think I mainly wanted to make sure that I wasn’t missing something huge. I was accused of not trusting the advisor (true) and doing research on the internet (true) and that any information I found on the internet wasn’t tailored to my specific circumstances. Obviously this is also true, but this advisor doesn’t have my complete financial picture because honestly, I don’t trust him. However, how could it possibly be wrong for me to research my options instead of blindly following what feels like poor advice for me? Given that we already… Read more »

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Paularado

11 years ago

@HaideeL,

Our policy is through West Coast Life via an Independent Insurance Agent. He looked at our stats and it turned out that they had the best rates for both of us (me and DH). We both got premium rates as a result of physical health.

Paula

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DDFD at DivorcedDadFrugalDad

11 years ago

Great post!

People need to know more about life insurance . . .

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edf

11 years ago

I’m in my early 30s, married and have two chilren. Got life insurance shortly after I got married 5 yrs ago, term $1M policy. Had trouble getting the policy due to chronic IBS diagnosis. After one insurance denied me and another broker had a hard time finding a taker for about six months, I took what I could. The policy is quite expensive, almost $220 a month. I always ask myself if its really worth it and think about shopping again. Ray or anyone else, your insight wld be appreciated.

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James Fowlkes

11 years ago

This is great, just what I need to send to my friend who is looking into this right now. Thanks. Also, I just tweeted this link.

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Ray

11 years ago

@edf- I am sorry to hear about your illness I hope things are better now. I dnt think there is anything wrong with shopping around for cheap insurance, however just make sure that you compare apples to apples (similar policies). The policy is pretty expensive but it’s a $1million policy with health issues. If the cost is an issue on your budget ask yourself couple questions: Do you really need $1million? if you reduce the face value the premium will obviously drop. If your health has improved and you can get your doctor to note that talk to the insurer… Read more »

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Nikki

11 years ago

This is a great post and actually encouraged us to get life insurance. However, we were also faced with the dilemma of how much is enough. We have 1 child and we’re in our 20s. 5x the yearly income seemed too high for us so we opted for the minimum for the term, but it was the same $ payout amount for each of us. Husband’s reasoning is, it should be a safety net not a jackpot. I’m a stay/work at home mom but have had a fairly successful career. I could probably jump back into work if heaven forbid… Read more »

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Ray

11 years ago

@ Nikki should life insurance be considered a windfall?

I dnt think that should be the primary use of it, but many do use insurance in that manner. It is often in cases of elderly people wanting to leave behind a legacy to grandkids or charities. And it can only be used that way if you purchase whole life which makes it even more expensive.

I think the primary use should be protection, as your husband mentioned, cover your debt and leave some extra behind.

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Meaghan

11 years ago

good advice. This takes away some of the mystery.

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Mike

11 years ago

I’m an insurance agent and you make some good points on what to look for. One of the “hidden” things that you won’t find out without a good agent is the how each carrier underwrites coverage. One company I work with has very loose guidelines with height and weight requirements. Whereas one of the companies that always comes up as cheapest online has very tight guidelines. So just because they quote great prices online doesn’t mean you will get those prices. Sometimes you would be better off with some of the lesser known companies. I haven’t sold a whole life… Read more »

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Dave Shafer

11 years ago

“I haven’t sold a whole life policy in years but I can’t figure out why there is soo much animosity towards agents that sell them.” I sell EIUL policies almost exclusively because in my opinion it is the savings vehicle on the market. To answer your question directly, the animosity is there because of the propaganda coming from Wall Street that encourages folks to overestimate the returns they will get from their mutual funds [indexed or not] and underestimate the value of permanent life insurance either as a death benefit or used for living benefits tax free! A cursory look… Read more »

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Dave Shafer

11 years ago

Sorry, my initial statement should have said I sell EIUL policies almost exclusively because in my opinion it is the best savings vehicle on the market.

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haidee

11 years ago

@Dave @ Accidental FIRE Shafer Certainly the final result is more important, but when you have someone suggesting a whole life policy where it costs 1223/yr for a 100k insurance policy, where my term costs 475/yr for a 500k policy, I simply cannot afford to have that little coverage for that high cost — I’d have to have both. Which seems bordering on the insane to me. I have to say, honestly seems to me like it’s being sold to me (a terrible candidate for it right now) based solely on the agent’s commission and not on what’s best for… Read more »

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Dave Shafer

11 years ago

@Haidee, if you feel that way you are most certainly correct. And you are absolutely correct about any negative emotion around salespersons who don’t connect what is best for their client to what is best [long term] for themselves! There is a place for term insurance.

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Dave Shafer

11 years ago

@Haidee Having both term and permanent is a valid way to go. I have both. My need for term insurance drops every year as my net worth increases and my child gets closer to adulthood! But the permanent insurance is an asset that increases in value every year! By the time I get to retirement age it will be worth enough $$ that I will be able to live off of the tax free distributions if I want to. It provides the base of my financial plan allowing me to take more risk elsewhere! Admittedly, this type of thinking isn’t… Read more »

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Mike

11 years ago

Dave, I haven’t looked into selling the equity indexed products but I will check them out. I think like most anything we buy it’s different strokes for different folks. As an agent, if a client has the need, and buys life insurance regardless of the type, than I did a good thing. Just because agents make more or less commission on a product does not make it a bad product. Do you question your real estate agent for their huge commissions or doctors or lawyers or really anyone that has a vested interest in growing their income. You have to… Read more »

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Jeff

11 years ago

Nobody “needs” life insurance. You would figure out a way to function after a death of a loved one. It really becomes a “want”. A good way to decide how much death benefit to buy would be to ask yourself a question and be honest with your answer. If I were married I would ask myself…If my spouse died tomorrow and a week later my insurance agent called me and said “I’m sorry to hear about your loss but I have your spouse on a 3-way call from Heaven right now and I want to ask you both a question…I… Read more »

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Y Michael

11 years ago

Does anybody know Terminal Illness is always part of the life insurance policy? Does all policy has it?

Thank you.

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Jeff J

11 years ago

@Y Michael According to your website…you specialize in all types of life policies. Shouldn’t you know the answer?

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Hi! I’m J.D. Roth. I'm here to help you master your money — and your life.

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